My bullish call on penny stock Greatland Gold (LSE: GGP) back in August 2019 remains one of my most satisfying. A little over a year later, the GGP share price had jumped to 38.5p. That represents a gain of around 2,200%, by my calculations.
Since then however, the value of the stock has more than halved in value. Will the publication of the pre-feasibility study (PFS) for the firm’s Havieron project arrest the gold miner’s decline?
Great potential
If you’re new to mining stocks or investing in general, it’s worth clarifying the purpose of this analysis. A pre-feasibility study is conducted early on in the lifecycle of a mine. It gives a company, its backers and would-be backers an idea about whether it makes economic sense to carry on digging.
As my Foolish colleague Zaven Boyrazian reported on Tuesday, there was a lot to like about Greatland’s PFS on the South-East Crescent of the deposit. An estimated rate of return of 27% means GGP (and partner Newcrest) should only take three years to recoup costs once production begins.
The fact that this study was only focused on 28% of the initial resource estimate also gives some indication of just how big (and lucrative) Havieron could become.
Unfortunately, the GGP share price fell heavily on this news and now sits at just above 17p. This is the case despite GGP investors now having some concrete numbers to work with. It’s also despite gold being seen as a good hedge against inflation, which might not be as transitory as some economists previously believed.
Wait – why did the GGP share price FALL?
I suspect it’s down to investors’ expectations becoming a little more realistic. This makes would-be buyers less likely to get carried away and bid up the share price to questionable levels. When this is accompanied by a wave of ‘sell on the news’ traders, GGP’s share price fall does make some sense.
There are other considerations. Even if everything goes to plan from here (and that’s extremely rare for mining projects), Greatland doesn’t expect to begin extracting the precious metal until 2024. That’s a long time for holders to wait while the share prices of other penny stocks zip ahead.
As always, investing requires reflecting on what I’m potentially giving up elsewhere by staying loyal to a particular stock (otherwise known as ‘opportunity cost’).
Other risks to consider are that miners are never in control of the price of whatever they dig up. After years in the wilderness, the precious metal’s valuation soared last year in the aftermath of the Covid crash. In 2021, it’s been a very different story.
Without a mine in operation, that’s arguably less important for GPP than an established player. However, it won’t always be the case.
Buy the eventual dip?
Is GGP a beaten-down bargain? Possibly. Tuesday’s report certainly highlighted the massive potential of the project. I also think there’s a lot to be said for Havieron being located in a mining-friendly, politically stable part of the world.
At £700m however, I reckon it will take a lot more than before to move the company’s valuation significantly higher for a while. Perhaps this is now one for me to snap up in the next (inevitable) market crash?
